Decentralization is a key theme in the shift from pipes to platforms. Pipe businesses relied on a centralized model of value creation and exchange. The model was built around a supply chain that they one or managed through contracts. Platforms decentralized the value creation and exchange.
Today’s platforms, Uber, Airbnb, Etsy, and others, all have one thing in common, they are scaled intermediaries that operate a decentralized model of value creation and exchange. Their exchange is considered decentralized because both the supply and demand side are directly controlled by the platform operator. For example, Uber operates a decentralized transportation exchange. The exchange was once controlled by the taxi industry, through the issuance of licenses and capital expenditure requirements. These prerequisites limited the number of taxi drivers available in a given city and thus limited supply side. By limiting supply side, the taxi industry controlled the exchange of rides in a given city, making it very difficult for anyone to become a taxi driver. Uber decentralized the supply side, by allowing any driver the opportunity to drive and serve travelers.
Despite the fact that Uber’s exchange is decentralized, Uber still exercises significant control over the platform. This is because Uber owns the identity of its participants, the transportation logistics, the payment mechanisms, the pricing, and the rules that govern the marketplace. More importantly, Uber – as a central intermediary – manages both the openness of the platform to its participants and the governance of their participation. As an intermediary, Uber poses all the threats that traditional intermediaries have posed while managing and regulating markets.
This is why the blockchain could create a whole new model of platform intermediation.
The blockchain has many definitions but there are two key aspects that make it of particular interest for the future of governance. First, it leverages a peer-to-peer network to govern transactions and interactions across a distributed community. Second, it manages this governance through a decentralized ledger that benefits from having a distributed computing infrastructure and a common protocol making it nearly impossible to create a fraudulent transaction.
Intermediaries and the risks they carry
Historically, intermediaries such as banks, financial institutions, governments, policy makers, and corporations filled the role of the trusted advisor. They operated a set of protocols that provided a layer of trust, on which all commerce could operate. Intermediaries were a necessary outcome of moving from a local market economy to an industrial economy run by capital. While intermediaries worked to increase trust and reliability in the functioning of markets, history is filled with disasters where the intermediary injected doubt and mistrust into the system. One such disaster was the 08’ financial crisis.
As platforms transform the economy, we’re seeing massive consolidation in markets where platforms benefit from winner-take-all. Not all markets show these characteristics but we’ve seen several platforms benefit from this at national and global scales over the last decade. As these platforms scale their role as intermediaries, they often extend their function in ways that may harm the ecosystem that relies on them. Last fall, we saw Uber increase its commission from 20% to 25% hurting the income of black cab drivers Forbes. Without debating the merits of the change, the move did reveal the hidden risks of relying on platform intermediaries.
Blockchain-based models of governance
Blockchain startups all over the world are trying to address this risk. The blockchain provides the ability to codify any piece of software and deploy it on top of itself. This includes the ability to codify all the roles and functions that an intermediary has historically performed. The code is then deployed across many distributed computers and with a high level of certainty, we can assume the code will execute in the same way every time. This unique architecture makes the blockchain very suitable to create an alternate model of platform governance. Today’s blockchain startups take the foundational building blocks required to build a platform and decentralize them. Building blocks such as identity, governance, banking, credit, data, and payments are being re-imagined and codified on the blockchain. These are early days but distributed technologies like the blockchain could signal a shift towards decentralized intermediaries.
This post was co-authored with Sangeet Choudary the Founder and CEO of Platform Strategy Labs